Who was Bernie Madoff?
Bernard “Bernie” Madoff was an American financier who at one time was non-exclusive chairman of the NASDAQ stock market. In 1960, Madoff founded a penny stock brokerage which grew into Bernard L. Madoff Investment Securities. Here he served as the company’s chairman until his arrest in 2008 for committing the largest Ponzi scheme in history.
Over the course of 17 years, Madoff defrauded more than 40,000 investors out of more than $65 billion. He was sentenced to 150 years in prison, forfeiture of $17.179 billion USD, and received a lifetime ban from securities industries.
Madoff died in prison on April 14, 2021, at the age of 82. He is considered by many in the finance world as the ultimate evil. His death and legacy will haunt the financial industry for years to come.
Advisors Regaining Trust
Madoff’s Ponzi scheme really highlighted an issue that we don’t talk about often: most people don’t have good financial literacy or an understanding of what advisors do. Of course Madoff’s behavior was extreme, but advisors must draw a distinct line for their clients between how they operate and how Madoff did. Acquainting yourself with Madoff’s practices will help you understand how to spot a trustworthy advisor.
One big red flag on Madoff’s operations was that he acted as custodian for his client’s assets. A custodian is a financial institution that holds its customer’s securities for safekeeping preventing them from being lost or stolen. He also generated his own statements for clients which were false. The advisor needs to communicate to the client that their money is with a third-part custodian who generates independent statements.
Even if you are not very financially literate, your advisor should be willing to explain the markets, financial matters, and exactly how they’re handling your money, earning (and not assuming) your trust.
Avoiding Another Madoff
Ensure you’re not running into another Bernie Madoff by making sure your advisor isn’t overseeing every part of your investing.
Here are a few questions for you to ask your advisor:
- Who is selecting my securities?
- Who is executing my trades?
- Who is keeping custody of my assets?
- Who is verifying my performance?
Of course, your advisor may be selecting your securities, but pay close attention to how they answer the other three questions.
Madoff exclusively controlled his clients’ securities, trades, and kept custody of their assets. As for verifying performance, he had a small outside auditor help with his scam to sign off on the fake returns.
Research, Research, Research
When looking into advisors one thing you want to check to see is if they have any adverse actions at the Securities and Exchange Commission, the Financial Industry Regulatory Authority (FINRA), state securities departments, and state insurance commissioners.
It can be a tedious process as around 5% of financial advisors receive a client complaint at some point in their career. To put this into perspective a bit, 8% of attorneys receive complaints annually and 5% of doctors are sued every year. For all three, sometimes the complaints hold no bearing but sometimes they do.
Madoff had to pay $15,000 in fines after a violation in 2005. The details are a bit unclear, but it seems that his firm withheld required info from the NASDAQ exchange.
To Wrap Things Up
Now, it’s been over 10 years since Madoff began his prison sentence. It’s almost certain his recent death will resurrect more client concerns with respect to their financial advisors.
At NEST Financial, we’re always going to be upfront and transparent about our practices. If you’re worried your current advisor may be a Madoff or if you have anxiety surrounding your search for an advisor, contact us to set up a no-commitment introductory meeting. We’ll be sure to put your worries at ease.
